Evaluating distributed ledger technology
Published by the Stockbrockers and Financial Advisers Association of Australia in the Stockbrokers and Financial Advisers Monthly, May 2017.
In the last few years there has been increasing interest in distributed ledger technology (DLT) – also known as blockchain – from market infrastructure providers and participants, including innovative financial technology (fintech) firms.
DLT is a configuration of technology components that helps record and track information in a ‘distributed’ (as opposed to ‘centralised’) manner. This configuration enables participants of the network to have secure access to a consistent view of the information on the ledger at any point in time. The configuration and associated cryptography also helps information to be stored more securely and accessed in a tamper-proof manner.
To date, we’ve seen DLT uses in foreign exchange (FX) remittance payments, securities settlement systems, debt issuance programs and digital identity initiatives. Overseas, there have also been developments in arrangements to support private securities transactions, interbank payments, and netting services for repo and foreign currency markets.
We expect the range of potential DLT applications will continue to grow over time. This could have far-reaching implications for your organisation – affecting the way that you operate and the structure of the market in which you offer your services.
To help you understand the regulatory considerations of this emerging technology, we have published Information Sheet 219 Evaluating distributed ledger technology.
The information sheet includes an assessment tool to help you assess whether your DLT-based service meets the technology and risk management standards that ASIC requires of the firms it regulates. The assessment tool asks six categories of questions that will help you and ASIC evaluate the use of DLT for your business.
These questions are asked in the context of our regulatory framework and your existing requirements to have adequate human and technological resources and risk management arrangements. At this stage, we believe the existing regulatory framework is able to accommodate DLT but, as it matures, additional regulatory considerations may arise.
The six categories of questions are:
- How will the DLT be used? We want to understand the problem you are trying to solve and the proposed access rules for users of the DLT-based service.
- What DLT platform is being used? There are a range of different DLT platforms each with its own features, strengths and limitations. We would like to understand why you selected the particular platform and what work you have done to test it.
- How is the DLT using data? We want to know where your data is coming from and what arrangements you have to allow certain users to see it while keeping it private from others.
- How is the DLT run? The governance model of the DLT-based service is critical to understanding the risks users are exposed to and the steps taken to mitigate those risks.
- How does the DLT work under the law? The DLT-based service is subject to the legal and regulatory framework of the relevant jurisdiction. In Australia there are scenarios where the legal system does not permit enforcement of a contract solely on its terms. The DLT will need to be flexible enough to accommodate this.
- How does the DLT affect others? Because of its operation within a broader market environment, we would like to understand the possible impact of the success or failure of your DLT-based service on others who do not directly use the service.
If you think about these questions before you approach ASIC for guidance or an application, our response to the issues you raise will be quicker and more efficient.
Some questions may be more applicable to some business models or services than others. For example, if your service has the potential to have an impact on the wider financial system or if your participants are important in terms of their size or interconnectedness, we may give greater consideration to questions about scalability, network effects and financial stability.
We will closely watch adopters of DLT-based services to make sure the technology does not erode the integrity and good reputation of Australia’s financial markets. Our approach to market developments like DLT is to harness the opportunities and economic benefits, and not stand in the way of innovation and development. At the same time, we need to protect investors from the risks of digital disruption.
If you are an innovative fintech considering the use of DLT and you want to discuss your proposed business model with ASIC, contact us via the Innovation Hub or through your established ASIC channels.